European Systemic Risk Board Sounds Alarm on Crypto and DeFi

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The European Systemic Risk Board (ESRB) said Thursday that despite a volatile year for crypto, its effect on traditional financial systems has been minimal. Even so, the board still cautioned against additional oversight.

This marks a slight change of urgency, where the European Central Bank (ECB) previously called for immediate regulation to reduce the systemic risks posed by crypto.

While European lawmakers finally answered the call via the Markets in Crypto Assets or MiCA regulation in response in April, which set standards for stablecoin regulation and crypto oversight, more legwork is needed, said the ESRB.

The ESRB is closely linked to the ECB, providing secretarial and logistical support with the banks’ president, Christine Lagarde, who chairs the boards.

In a report released on Wednesday, the financial watchdog highlighted the need for continued oversight, especially around DeFi and smart contracts, which fall outside the mandate of MiCAs.

Given the impressive growth trajectory and unpredictable future of crypto markets, potential systemic risks cannot be ruled out, the report states.

These risks could materialize if, for example, interconnectedness with the traditional financial system increases over time, he said.

For now, crypto poses no such risk after a rout in the industry last year, the ESRB said.

Still, the report recommends that policymakers implement several changes to allay existing regulatory concerns. These include regular reporting requirements for financial institutions exposed to crypto.

Gasper Stih, chief marketing officer at ZondaCrypto, told Blockworks that while the language and message of the reports differ somewhat from past years, the ESRB maintains a similar theme.

While the report attempts to give the impression of overall systemic risk, it also acknowledges that the DeFi market is very small.

This seems to indicate that any threat perceived by the ECB is a threat that only exists in the future, raising the possibility that the council is underestimating the speed at which the crypto and DeFi market generally progresses, said STIH.

A short term solution

The ERCB highlighted the need to identify and address systemic risks arising from these areas, suggesting that the potential for prudential, reputational or operational risks could be magnified.

As such, the ESRB recommended promoting knowledge exchange at EU level and monitoring of market developments. This includes a particular focus on operational resilience, DeFi and digital asset staking, and lending activity.

The intention, they say, is to identify, assess and mitigate potential risks to financial stability and the effectiveness of macroprudential policy.

Although that shouldn’t be the only area of ​​focus, Stih said.

What is more important going forward is to focus on reducing manipulation and exploitation of crypto and DeFi, as these remain key factors that continue to cause excessive volatility. on the market.

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